Business Model Alchemist

In my last blogpost I used the expression real-time business model design, which I didn’t really explain. What I meant was the manipulation and exploration of different business models in real-time during a business meeting (real-time means that I immediately see the impact of the change of a variable in a dynamically changing systems). An example would be the exploration of what would happen to my company’s business model if I added another distribution channel. What cost consequences (savings/expenditure increase) would this new design have? How many more customers could I reach? What capabilities would this require? Which partners would I work with to provide the channel?

Such real-time business model explorations are still the exception during most meetings. However, I’m pretty sure real-time design explorations would boost the outcome of meetings on more strategic content, such as a company’s business model. In most cases a set of prepared static (business model) scenarios are discussed. Probably a flip chart gets employed at one point to visualize some ideas. Design veterans might use colored paper, the wall and numerous post-its. In best cases, an eager manager has put in some extra-hours to come up with a spreadsheet that is sophisticated enough to allow real time changes. Then the meeting participants will be able to explore at least the financial side of business model design choices in real-time.

When I saw the video on experimental multi-touch user interfaces that I wrote about in my last blog I immediately saw some applications in real-time business model design and exploration. Of course the HOW is not clear yet, but the potential is there. Multi-touch user interfaces and a well designed software-assisted business model design tool could overcome some of the hurdles business model design and exploration faces in companies today. In my opinion the main issues are:

• Paper-based methods, such as flip-charts, colored paper and post-its are not flexible enough to capture the links and causal relationships between different business model building blocks. Thus, when a group of managers decides to explore adding a new distribution channel to their business model, they might be able to add a post-it representing the channel to the overall picture, but this will not show the consequences on the rest of the business model design.
• Spreadsheets on the other hand allow modelling the abovementioned problem of linkages and causal relationships reasonably well, but mostly at the expense of visual understanding. So while spreadsheets, if they are modelled well, allow some exploration, they don’t have the visual strength of paper-based methods.
• Finally, most managers are not really at ease thinking in terms of conceptual models and model manipulation. And using a software-based tool to manipulate a business model would probably overstrain at least 90% of today’s managers.

Multi-touch user interfaces could potentially address all three issues. I think its main contribution will be in making the on-screen manipulation of the different elements of a conceptual models more intuitive. This could considerably lower the barrier for managers to use software-based business model design tools.

In fact, Jean-Sébastien Monzani from the University of Lausanne is exploring new ways of visually representing and manipulating business models together with me. I’m sure multi-touch user interfaces could find their way into Jean-Sébastien’s work if our collaboration was more extensive and well founded. At the moment, however, we are doing more ad-hoc work and we’re only getting somewhere because of Jean-Sébastien’s exceptional programming and graphical skills…

(The first picture is from Jeff Han’s website on Multi-Touch Interactin Research. The second picture is a representation of Ticketcorner.com’s business model which I am currently working on…)

The video below shows one of the fascinating multi-touch user interfaces that is emerging from research labs. Now use your imagination and picture a group of business developers manipulating concepts such as value propositions and distribution channels in real time on a large screen…

Imagine them dis-connecting and reconnecting customer segments with value propositions and core capabilities. Visualize them rapidly exploring a multitude of possible business designs – prototyping opportunities by simple movements of their hands. WOW. Now that would make meetings efficient: exploration in real-time and no need to go back to the drawing board and schedule new meetings…

By the way, this is the first time I try to post a youtube.com video on my blog – let’s see what happens.

In its June 19th issue BusinessWeek had an interesting article on the fact that HP has overtaken IBM in sales revenues this last quarter. The article nicely describes how both companies operate on completely different grounds and in very different environments even if they seem to be in the same industry.

While reading I processed the information about HP and IBM through the business model lens. Actually, this allowed for a nice visualization of the strategy and business model of both companies, which I sketched out in the figure below.

I only looked at five rough business model building blocks of each company: the value proposition, the target customer segments, the distribution channels, the revenue streams and the value configuration. This already gives a nice picture of the difference between the two business models even if it is only a simplified and very rough representation of reality (in the graphic I only put 4 business model building blocks).

HP’s value proposition gravitates mainly around consumer technology, such as printers (& cartridges), handheld PDA’s, home computers etc. They focus strongly on the consumer market segment. The revenue streams from selling consumer tech to consumer markets are generally characterized by thin margins and high volume in growing markets. In the case of HP revenues from replacement ink cartridges, which command 50%+ margins form the exception. The value configuration of HP’s core activities is essentially sequential, following Porter’s value chain of a production company.

IBM’s value proposition gravitates to a large extent around professional services, such as business IT consulting and services. They focus strongly on the business market segment – mainly on larger companies. The revenues from consulting and services generally command high margins, but are characterized by low growth. The value configuration of IBM’s core activities essentially follow a cyclical problem solving approach (analysis-design-evaluation).

Finally, it is also interesting to look at both companies’ competitive environments. HP, which focuses on consumer tech operates in an environment that features countless competitors and regular insurgents of which some can be quite disruptive. Innovation (or at least invention) still seems to play a larger role in consumer tech than in professional services. Interestingly, IBM is the global leaders in patent registration, which might seem counterintuitive with regard to their business model. Contrary to HP, IBM operates in a more stable market with large competitors such as Accenture the consulting company. Insurgents are rarer in this area, since the barriers to enter the market are higher than in consumer tech.

It will be interesting to follow how both companies and their business models evolve. The BusinessWeek article stressed the fact that HP has overtaken IBM in terms of revenue. However, at the end of the day it is only profits that count. Size alone doesn’t matter…

Come and participate in writing a collaborative wiki-based book on “Business Model Design and Business Model Innovation“. All you have to do is sign up for a free wiki account here and you can join editing the book. You will be writing for one of the first large-scale collaborative business management books in the history of management literature. Few if not none of the business authors and management gurus have dared to hand over their pen in order to tap into collaborative intelligence and global experience… Let’s try together!

I have been thinking of doing it for a long time and now I have finally launched the process together with Yves Pigneur, Professor at the HEC Business School in Lausanne, Switzerland. We believe the topic of business model design & innovation is timelier than ever. A recent IBM survey of over 765 CEOs shows: Business Model Innovation is on the top of their list. Thus, with the wiki-book we aim at helping today’s business leaders succeed in their quest for business model innovation by collaboratively building a reference manual with simple and easy to use visual tools.

We call on design and business practitioners, academics and consultants to jointly work towards the following goals of our wiki:

Improve the toolset for (business model) innovation…
…by borrowing methods from the design approach,…
…by using the business model as the unit of analysis…
…and by keeping it simple, practical and useful

We already set up a book structure and will populate the sections bit by bit. Hopefully, others will join and contribute their experience and thoughts to show what works. The book is structured as follows:

• Basic Premises for a Wiki-Based Business Book
• Defining Business Models
• The Quest for Business Model Innovation
• The Design Approach for Business Model Innovation
• Case Studies
• Conclusion

I know it will be a challenge to get people to write. However, some have already agreed to participate, despite their scarce availability, such as Jan Ondrus, Martin Koser, Ziv Baida and Suhit Anantula. I’m curious to see what happens and hope more people will join this adventure…

I finally took the time to edit the Wikipedia entry of the term “business model“. The entry was so bad it actually hurt me everytime I returned to have a look. There was absolutely no reference to the many valuable articles written on the topic. In other words no “business model expert” ever took the time to update the existing text… I put aside some time today to update the entry and in addition I created an entry for “business model design“. Im curious to see how the gatekeepers of Wikipedia will react… (By the way, there is no entry on me in Wikipedia yet, since I shouldn’t write an entry myself and I’m not famous enough to be written about – like e.g. Michael Porter

Following the text I submit to Wikipedia (I left some of the existing text on typologies):

Business Model

The term business model is relatively recent. Though it appeared for the first time in the 1950s it rose to prominence and reached the mainstream only in the 1990s. Today the term is commonly used, but there is still no single dominant definition. Based on an extensive literature review Osterwalder, Pigneur and Tucci (2005) define a business model as:

a conceptual tool that contains a set of elements and their relationships and allows expressing the business logic of a specific firm. It is a description of the value a company offers to one or several segments of customers and of the architecture of the firm and its network of partners for creating, marketing, and delivering this value and relationship capital, to generate profitable and sustainable revenue streams.

The growing body of literature using the term business model shows that there is a continuum between authors using the term to simply refer to the way a company does business (e.g. Galper 2001; Gebauer and Ginsburg 2003) and authors that emphasize the model aspect (e.g. Gordijn 2002). These two viewpoints differ because the former generically refers to the way a company does business, whereas the latter refers to a conceptualization of the way a company does business. Proponents of the latter viewpoint propose reference models that consist of elements and relationships that allow describing the business model of a company.

Busines Model Concept

Many different conceptualizations of business models exist (Chesbrough and Rosenbloom 2000; Hamel 2000; Linder and Cantrell 2000; Petrovic, Kittl et al.; Weill and Vitale 2001; Gordijn 2002; Afuah and Tucci 2003; Osterwalder 2004). They all have various degrees of resemblance or difference. The model proposed by Osterwalder (2004) synthesises the different conceptualizations into a single reference model based on the similarities of a large range of models. The author’s conceptualization describes a business model as consisting of nine related business model building blocks. Thus, a business model describes a company’s:

• value propositions: The company’s offers which bundle products and services into value for the customer. A value proposition creates utility for the customer.
• target customer segments: The customer segments a company wants to offer value to. This describes the groups of people with common characteristics for which the company creates value. The process of defining customer segments is referred to as market segmentation.
• distribution channels: The various means of the company to get in touch with its customers. This describes how a company goes to market. It refers to the company’s marketing and distribution strategy.
• customer relationships: The links a company establishes between itself and its different customer segments. The process of managing customer relationships is referred to as customer relationship management.
• value configurations: The configuration of activities and resources.
• core capabilities: The capabilities and competencies necessary to execute the company’s business model.
• partner network: The network of cooperative agreements with other companies necessary to efficiently offer and commercialize value. This describes the company’s range of business alliences.
• cost structure: The monetary consequences of the means employed in the business model.
• revenue model: The way a company makes money through a variety of revenue flows.

The process of business model design is part of business strategy. The implementation of a company’s business model into organizational structures (e.g. organigrams, workflows, human resources) and systems (e.g. Information Technology architecture, production lines) is part of a company’s business operations. It is important to understand that business modeling commonly refers to business process design at the operational level, whereas business models and business model design refer to defining the business logic of a company at the strategic level.

Many authors who write about business models fail to distinguish between business model design and business model implementation/execution. Yet, it is crucial to realize the difference between the two because they both require very different skills. Also, a company will only be successful with a sound business model design AND a consequential implementation. There is no such thing as a successful business model per se. This sounds obvious, but in practice the distinction is not always made. Often journalists, academics and business practitioners blame the business model for the failure of a company while the main flaw might lie in failed implementation.

In the graphic above I make the distinction between sound/flawed business model design and sound/flawed business model execution. Square B is the ideal situation where a company has succeeded in designing a sound and competitive business model and has been successful in implementing it.

Square A is the situation where a company apparently has a very competitive business model, but is showing difficulties in implementing it successfully. This can be due to various factors, such as the lack of experience (e.g. for start-ups), the lack of resources, missing leadership and so on. In such a situation the company will aim at moving from square A to square B, given they realize their implementation difficulties.

Square D is the situation where the business model is flawed, but the company is showing good implementation skills. At first it seems strange that such a situation should appear, but it can happen even to previously successufl companies with sound business models. This situation typically appears with the rise of new disruptive technologies or insurgent start-ups that rock the boat of established industries with established and similar business models. When a company finds itself in square D the first thing they have to do is to re-design their business model before readjusting their implementation/execution skilss.

Square C is reserved for companies that haven’t succeeded in coming up with a sound business model and in addition are bad at implementing their flawed business model. Their path to success also goes through business model re-design and implementation/execution readjustment.

So much for today. I will write a new post about the distinct skills required for business model design and business model implementation in the coming days. For now I am ripe for bed – obviously, after a great weekend day with my son on a steamboat on the lake of Geneva and a visit to the steam-engine parc “Le Bouveret”…

I just came back from a friend’s Ph.D. defense in Amsterdam. For the last few years Ziv Baida has worked on software-aided (business) service bundling and it was great to see him receive his doctoral honors.

Ziv’s work is interesting for this blog for several reasons beyond the fact that his dissertation is of good quality:

• Ziv’s work is on a very relevant business design topic: service bundling. He coined the term serviguration to name this type of service bundling by means of configuration;
• His work comes out of a computer science lab and effectively bridges *the worlds* of business science and computer science! This multidisciplinary approach opens up new paths to innovation.
• Ziv produced a computer artefact that assists the business developer in designing/bundling services. This resulting tool is a good example of the Computer Aided Business Design that I have been talking about in an earlier blog.

CONGRATULATIONS ZIV TO YOUR TITLE AND YOUR WORK!